Monday, September 28, 2009

A Serious Warning From the Federal Reserve about Interest Rates

From Economic Policy Journal:

This gets a bit technical, but the Federal Reserve is flashing that there could be serious, I am talking major league serious, interest rate hikes down the road.

The first clue to this was last week Thursday's report out of FT that the Fed may use mutual funds as a source to shrink Fed reserves by conducting reverse repurchase agreements with the the funds. When something like this is leaked by the Fed, they are trying to alert the markets so they won't be surprised by such a move when it occurs. As I wrote last week, I saw one reason for this move as the Fed:

...contemplating doing this, if banks start to lend against excess reserves, as a back up to Bernanke's plan to control money growth via the interest rate it pays on excess reserves.